Understanding how to get a home loan and buy a house is key in making the leap from renter to homeowner a smooth and easy transition. Follow the guide below to get a good mortgage and speed up the home-buying process.
Save for a Down Payment
The first step in getting approved for a mortgage is having the appropriate down payment. The total amount required depends on the type of loan you can qualify for, as well as the total purchase price of the home.
Most lenders require a minimum down payment of more than 5 percent to qualify for a traditional mortgage, and a minimum of 20 percent to avoid a mortgage insurance requirement. Individuals and couples who are just starting out and do not have a large deposit saved up can qualify for Federal Housing Administration mortgages if they meet certain criteria. If you are applying for an FHA loan, make sure your credit score is at a minimum of 580 so your down payment can be only 3.5 percent of the asking price. If your score is lower, you might have to pay more.
Find a Mortgage Lender
Finding a trustworthy mortgage lender is just as important as choosing a knowledgeable real estate agent. Take the time to meet with multiple mortgage brokers and local banks or credit unions to see what rates and loan options they can offer you.
Ask what the current mortgage rates are and what a possible amortization schedule would be for a house in your price range. A reputable lender will also supply a good-faith estimate of all of the settlement costs, as required by the Real Estate Settlement Procedures Act, so that you’re fully aware of the costs involved in your mortgage.
Mortgage Eligibility Requirements
Your income and credit history are primary factors lenders use to determine whether they’ll approve you for a mortgage, but you’ll be a more attractive borrow and qualify for a better mortgage rate if your score is higher. Additionally, most qualified mortgage lenders will not approve you unless your debt is less than 43 percent of your monthly pre-tax income, according to a Consumer Financial Protection Bureau report.
Check Out: What Is My Debt-to-Income Ratio?
Once approved for a mortgage, get a preapproval letter from your lender before you start shopping for a home. Having preapproval not only gives you a clear budget for house hunting but also can give you more negotiating power and show home sellers that you are a serious buyer.
How to Get a Mortgage With Bad Credit
It is possible to get a mortgage with bad credit, but if you have a low credit score, you’ll likely have to pay higher mortgage interest rates and additional lender fees because you are a higher-risk borrower. The U.S. Department of Housing and Urban Development offers free and low-cost advice to help people with bad credit get into a home. You can make an appointment at your local housing counseling agency for a consultation.
Get Your Financial Documents Ready for Your Loan Application
A mortgage broker or lender will need you to submit documents that prove your income, current assets, and debts to assess your ability to pay the mortgage. These are the items you’ll need to gather for your mortgage application:
- Your Social Security number for a credit check
- Proof of income for the previous two years, including W-9s and federal tax returns
- Current proof of employment in the form of pay stubs for the previous four weeks
- Two to three months’ worth of bank statements for each of your accounts
- Proof of any additional income, such as child support, Social Security benefits and dividend earnings
- Documentation for any existing loans, including car loans, credit cards and student debt
- Proof of any court-ordered payments, such as alimony and child support
- Information on the property you intend to buy, such as the purchase price and current required property taxes, which you can get from your real estate agent
Budget for Closing Costs and Other Expenses
In the process of calculating your budget for your mortgage, don’t forget to factor in costs that can add up at the end of the home-buying process. Get clarification from your lender and real estate agent on who is responsible for paying any closing costs or escrow fees. If you’re interested in buying a house that will require renovations, make sure your home loan amount can cover the costs you anticipate.